Gifting and inheritance tax: considering the rules

Research published recently by the Institute for Fiscal Studies (IFS) and the National Centre for Social Research (NCSR) suggested that just 45% of individuals seeking to make a financial gift are aware of the inheritance tax (IHT) rules and exemptions. Here, we take a look at these in more detail.

Considering exemptions

An individual is entitled to give gifts of up to £3,000 per annum without incurring an IHT charge. An unused annual exemption may be carried forward for one year only – this may only be used in the tax year that immediately follows.

Individuals are also able to give as many gifts as they'd like, up to £250 per person, per tax year. Gifts between spouses/civil partners are exempt from IHT, and, on death, a spouse is able to pass on their unused nil-rate band. The nil-rate band currently stands at £325,000.

Gifts to children in consideration of marriage of up to £5,000 are exempt, as long as they are made by parents. Meanwhile, wedding gifts of up to £2,500 given to grandchildren or great-grandchildren are exempt from IHT, and £1,000 is exempt if the wedding gift is given to an alternative relative or friend.

Gifts to registered charities are exempt from IHT, as long as the gift becomes the property of the charity or is held for charitable purposes. Meanwhile, gifts made to political parties are also exempt, under certain conditions.

A gift given in order to assist with family maintenance does not give rise to an IHT charge. Such gifts may be given as a transfer of property upon divorce; gifts given to children aged under 18 or those in full-time education; and gifts towards a dependent's living costs.

IHT and lifetime gifts

There are three categories that 'lifetime gifts' can fall into:

a transfer made to a company or a trust (excluding a disabled trust) is immediately chargeable

exempt gifts which are ignored when they are made and on the death of the donor (such as gifts to charity)

transfers that don't fall into the first two categories are Potentially Exempt Transfers (PETs), and IHT will only be due if the donor dies within seven years of making the gift. The amount of IHT due will be determined on the number of years that have passed since the gift was given and the donor's death.

In regard to PETs, gifts made within three to seven years before a donor's death are taxed using 'taper relief'. Therefore, the IHT rate for three to four years between gifting and death currently stands at 32%; for four to five years it's 24%; for five to six years it's 16%; and between six and seven years it is 8%. No IHT is due on the gift after seven years.

A look at the nil-rate band

The rate of tax on death is 40%, and 20% on lifetime transfers, where chargeable. For 2019/20, the first £325,000 chargeable to IHT is at 0% - this is called the 'nil-rate band'. An additional Residence Nil-Rate Band (RNRB) is available where an interest in a qualifying residence passes to direct descendants. The amount of relief is £150,000 for 2019/20: this is set to rise to £175,000 for 2020/21.

Here, we have provided just a brief outline of some of the issues to consider when giving gifts. There may be scope for additional savings when factoring giving gifts into your estate planning – please get in touch for more information.